One of the biggest challenges facing any family is the movement of wealth from one generation to the other. Throughout the family journeys we’ve supported, I’ve seen that often, it is not the actual movement of money that is the story but rather the purpose of a family’s wealth and each individual’s role within that.
Your family and their future – read our insights and guidance for wealth families
That story hasn’t changed significantly over the last two decades, essentially because the concerns of the older generations are as timeless as ever – wanting to pass their wealth smoothly to their children without inviting irresponsibility or complacency. There’s a common adage for providing children with the ability to do anything, but not the incentive to do nothing. This currently feels more relevant than ever, as the levels of wealth we assist families with has increased significantly as valuations have risen and businesses and assets have been sold. The UK is now experiencing the largest wealth transfer in history as £5.5 trillion is expected to pass between generations by 2050[i].
Today, we’re seeing the responsibility to pass on wealth in the right way sit with the ‘sandwich generation’ – those who are looking after both their elderly parents and their young-adult children. They could be mid-fifties and looking to move their parents closer to home as their needs become more complex. Simultaneously, they’ll be encouraging and educating their twenty-something children who have decided they would like to follow their own career paths.
They’ll now be looking ahead to utilise their wealth to provide for future generations and are therefore keen to invest their money for income while protecting their capital. They’re excited about the prospect of giving to the causes that have mattered to them throughout their lives, but conscious of inheritance tax and the need to provide for their own children.
Such a scenario throws up a plethora of issues that would likely keep any parent up at night. Which other family members do we support? How do we support those who may be less able to manage their own financial affairs? If our children are acquiring property, do we buy it for them, fund a deposit, loan them money or buy it in a trust? When and how do we tell them how much money might be available and what it is all for?
Solutions are often as singular as each family, however our work with clients has shown that good communication is the currency of success. There are many clear reasons for keeping an open dialogue but in the first instance it’s important to ensure the next generation have a good understanding of their circumstances and their reality. If you are pacing their knowledge of your wealth, then don’t underestimate the prevalence of information online and what their friends and peers may be saying to them. We’ve found that an introduction to your family’s philanthropic ventures is a good way to frame your wealth, what it does and the responsibilities they’ll be coming into.
A safe space to learn
This framing is something we’ve been happy to facilitate for clients and their children at Coutts and complements a suite of services and experiences we offer to connect the next generation with the circumstances of wealth in a positive and constructive way. This involves the Coutts Institute and our ‘Collab’ programme which invites children of clients, typically those moving over the threshold of adulthood between 21-35, to join us for a day of workshops.
Together, we take them through everything from financial planning and investing, to entrepreneurship and networking, to managing reputational risk through social media. We also invite external specialists and existing clients in as guest speakers to share their journeys and experiences. We aim to give a grounded approach to any situation they may encounter – from understanding tax and mortgages, to why they find they’re always being asked to buy the next round at the college bar.
Recently, we’ve seen a great response to the entrepreneurial guidance we offer and we’re happy to see that the networks of next generations we've connected have become friendship groups who organise regular ‘Collab Alumni’ socials. These sessions also help to build cross-generational confidence that the family’s wealth is in good hands and that it can be nurtured and passed on in the same spirit it was received.
Winning the generation game when passing on wealth
Another keystone in the confidence bridge is the creation of a family charter – a document outlining the purpose and shared desires for family wealth within a set of mutually agreed principles. We work to define charters with clients, to make sure future generations who didn’t overlap with the wealth creators still feel connected to, and responsible for, the wealth they’ll receive and which the charter guides. We’ve seen this work by marshalling those feeling the flush of youth, who may have to be reminded the family wealth is for their education, not fast cars and slow horses.
When it is time to pass on to next generations, don’t let your legacy be misconstrued. We’re very proactive with clients to make sure their wills and the legal vehicles for transition are understood by all parties. Having an unclear definition of dependents or named recipients can be extremely problematic – especially if family members only know your will after you’ve passed.
We encourage our families to be as considerate of all the variables as possible, while of course being aware that you cannot plan for every eventuality. Fortunately, where circumstances do change, trusts are now more flexible than they once were and can be realigned if needed.
Making good a fortune
I recently shared a dinner conversation with two clients. As siblings they had both been gifted a substantial amount by their parents as part of the transfer of the family wealth to the next generation. We discussed their experience and how the blessing of receiving such wealth rightly came with responsibilities. In part their consciousness of this was formed by their parents’ guidance in hand with the family’s collective aims for the future. Equally though, they felt encouraged and able to make their own decisions and plans – respectful of the family’s wishes and aware they too would one day be passing wealth down to another generation.
We always look to learn from our clients. In this regard, I felt privileged, as what I took from that conversation is that it is never simply money you are passing to your loved ones. Prudent next generational planning is really the exchange and receipt of the important values that give wealth purpose through knowledge, ambition, respect and responsibility.
This article is taken from Your family and their future, our guidance for wealthy families marking 20 years of Coutts family office services.
To find out more about how we could help your family plan their wealth across generations, or to learn about the Coutts Collab programme, please speak to your Private Banker.
